Standing Committee F

[Mr. Joe Benton in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38) - Clause 40 - Treatment of deductions from payments to sub-contractors

Question proposed [16 May], That the clause stand part of the Bill. 
 Question again proposed.

Howard Flight: We and the industry broadly welcome this clause, which provides a cash flow advantage and in part resolves some long-standing problems, but I want to raise two issues, one of which appears as a starred amendment.
 First, in parallel territory in the context of IR35, a similar problem was dealt with by ESCC32 for the tax year 2000–01 and its application to subsequent years was to be reviewed. I should be grateful if the Government would confirm that the measure will apply to 2001–02. 
 Secondly, clause 40 does not provide for tax deducted from payments under the construction industry scheme to reduce PAYE liability to account for tax on payments under that scheme made by an unincorporated taxpayer. Would it not be appropriate to put incorporated and unincorporated organisations on the same basis under the regime? 
 Although the provision is welcome, the construction industry scheme remains a problem because the Inland Revenue does not always enforce or police it effectively. There are minor improvements in the Bill, but there is a long way to go. Non-compliance and slack administration have the effect that some businesses may be hit hard while others are not noted. Are the Government considering resources to enable the scheme to be more efficient and policed more effectively? If not, is it worth continuing with it?

Dawn Primarolo: Good morning, Mr. Benton.
 I shall deal first with the general comments of the hon. Member for Arundel and South Downs (Mr. Flight) about the construction industry scheme. The clause applies only to that scheme. The Government are between the devil and the deep blue sea. The hon. Gentleman's right hon. Friend the Member for Fylde (Mr. Jack)—I think I can call him my right hon. Friend as well—was in the same difficult position as me. People argued that they wanted the scheme to be more tightly drawn and administered. However, when the compliance regime and its enforcement appeared to restrict activity in which they might want to engage, they came back with the argument that it is controlled 
 too tightly and is unfair on the industry, which undermines operations. 
 In response to demands from industry, the previous Government consulted, and it was agreed that the construction scheme would be put in place. Once it was put in place, people started to complain about it—what a surprise. They did not notice that that was going to happen, or they had not appreciated that it was going to happen. In the middle, the Inland Revenue struggles to ensure that it collects the proper amount of tax from the taxpayer. 
 My approach now, working with the industry and the trade unions, is to review. With representatives of all the organisations that participate in the construction industry, we have undertaken a fundamental reassessment of whether the current scheme, which has to be amended each year, is based on sound principles. One of the big issues that has come up has been whether we could move to electronic issue of the certificates. Industry and the Government are quite keen to achieve that. We are looking closely at how we are taking forward the scheme with the construction industry. I do not want to rush in and change the scheme, so I am taking the approach of stabilising it and making adjustments where it is sensible to do so. However, behind that, with the industry, trade bodies and the trade unions, I am considering the whole operation of the scheme very carefully. 
 The issuing of a certificate does not mean that a person is self-employed; it simply reflects how they should pay tax and whether a deduction should be made. I am more than happy, as we move to more detailed consultation, to ensure that the hon. Member for Arundel and South Downs is kept informed of that and is able to participate in it. The problem with the construction industry is that ''one size fits all'' does not work. It is a complex industry and we need to fine tune. I hope that that is helpful to the hon. Gentleman in showing the Government's thinking on how we are going to stabilise the operational scheme and ensure that everyone is happy with it. 
 Extra-statutory concession A32 applies in 2001–02. The hon. Member for Arundel and South Downs asked a question that was really about sole traders and partners, and their scope in the legislation. That brings us back to the point that I made about the scheme in general. We have sole traders, companies, individuals and partnerships. Our tax system treats each in a slightly different way. If we said that all those working in the construction industry had to be treated in the same way because they were in the same industry, we would have some difficulty. As I understand it, the hon. Gentleman was probing to establish why we do not bring partners and sole traders into the scope of the clause. We do not think that it is necessary to bring them in, and the feedback from the industry to date shows that the 18 per cent. deduction rate is about right for sole traders and partners. In practice, that is close to their final tax liability. I am not saying that some may have to pay slightly more, or less, but we think, as does the industry in our consultations, that overall it is a reasonable approximation. However, as with all tax rates and thresholds, this must be kept 
 under review. If circumstances altered, we would return to the matter. A theoretical problem is being advanced, but we have no information—nobody can give us any, even though we have asked for it—on whether it is a real problem that we should put right. I want to wait until the situation is more than anecdotal because of the issues it creates elsewhere in the scheme. 
 The 18 per cent. figure is about right for sole traders and partners. However, that was not the case for companies that paid under deductions, the majority of which faced serious cash-flow problems because some or all of the deductions that they suffered were due to be repaid to them—they paid us, we kept it and then we paid it back. The clause deals with real issues for companies. We have had no indication that a problem exists for partnerships or sole traders, but if one emerges over the next year, the Government will return to the matter. Rather than tinker with the scheme every year, we are yet again working with the industry to establish a scheme with which everyone is happy and which works well. 
 In the construction industry there is the problem of bogus self-employment. The Inland Revenue pursues compliance, but that sometimes becomes difficult because sub-contractors are chased through sub-contractors, and companies are not always able, or willing, to disclose information that we need. 
 I hope that I have explained to the hon. Member for Arundel and South Downs the main points relating to his amendment that was not selected. I take it that it would have been a probing amendment. I hope that I have allayed his fears for now.

Howard Flight: I thank the Paymaster General for her helpful reply.
 Question put and agreed to. 
 Clause 40 ordered to stand part of the Bill.

Clause 41 - Reallocation within group of gain or

Question proposed, That the clause stand part of the Bill.

Joe Benton: With this it will be convenient to discuss new clause 4—Company ceasing to be a member of a group—
'.—(1) In subsection (1)(c) of section 179 of the Taxation of Chargeable Gains Act 1992 (company ceasing to be a member of group) for ''six'' substitute ''two''. 
 (2) In subsection (6)(a) of that section for ''6'' substitute ''2''.'.

Howard Flight: Clause 41 contains measures relating to reforms for which businesses have been calling for some time, and the Institute of Directors has welcomed them. The clause improves flexibility.
 Section 179 of the Taxation of Chargeable Gains Act 1992 was introduced to combat the ''envelope scheme'', in which groups disposed of an asset pregnant with capital gain by transferring it to an intra-group, or to a special-purpose company, on a no-gains-no-loss basis, and then sold shares, rather than 
 the asset, in that company. The scheme was organised so that the capital gain from the sale of shares in the special-purpose company was lower than the gain that would have come from the sale of the assets in isolation. Under the section, the transfer of the original asset intra-group is taxed if the special-purpose company leaves the capital gains group within six years of the asset's transfer. The resulting de-grouping provision was inflexible and permitted no roll-over or ability to use capital losses elsewhere in the group. This clause and clause 42 seek to address those problems. However, six years is a long time to wait, and many straightforward commercial transactions are caught by the period. That other main criticism of the section has not been addressed. 
 The new stamp duty anti-avoidance clauses that we shall discuss later catch similar transactions but use a two-year time limit. Therefore, new clause 4 proposes a two-year time period. It has the support of the Chartered Institute of Taxation, which takes the view that it would be sufficient to counteract envelope schemes, so we hope that the Government will consider sympathetically putting the time limit in line with the stamp duty arrangements.

Ruth Kelly: Good morning, Mr. Benton. It is a pleasure to have you in the Chair this morning.
 I thank the hon. Member for Arundel and South Downs for his comments, which were made in a very constructive way, as usual. He recognised the fact that businesses have been calling for the reforms for some time, that they welcome the changes and that the changes will provide useful flexibility to businesses when restructuring. 
 The hon. Gentleman very ably explained the purpose of the original de-grouping charge, which is a long-standing anti-avoidance provision. It prevents tax from being lost when a company leaves a group, taking with it an asset that has been transferred to it tax free from another member of the group. The hon. Gentleman gave the example of a special-purpose vehicle being set up and then sold. 
 The de-grouping charge is triggered if the transferee company leaves the group within six years of the asset transfer. It operates by reference to a six-year period in order to strike an equitable balance between two competing considerations, which I shall outline. I hope that I can reassure the hon. Gentleman that reducing the period to two years is not a sensible manner in which to proceed. 
 The measure protects the Exchequer against a form of tax avoidance that is not time limited. There is a good case for saying that the provision should not be time limited at all and, as a matter of principle, it is right that groups should not be able to escape tax on gains by transferring assets to companies that then leave the group. In that regard, the tax, which is a tax on gains, is quite different from the stamp duty charge, which is a transaction tax. Therefore, there is a different issue in principle as to how the tax should be collected and the appropriate period in which to do it. 
 The other competing consideration that we must take into account is that, because companies and groups must maintain records of their transactions in order to comply with the provision, an unreasonable burden would be imposed if there were no time limit. Six years has long been seen as a relatively reasonable compromise. It is consistent with the period over which companies must keep records relating to their tax assessments, and we are not persuaded by the argument that it causes major compliance difficulties. 
 As the hon. Gentleman said, clause 41 and clause 42, which we shall discuss shortly, make significant changes to the de-grouping charge. Clause 41 will allow a gain or loss arising when a company leaves a group to be reallocated elsewhere within the group, thus creating greater flexibility in offsetting losses and gains. Clause 42 enables gains that arise on business assets to qualify for roll-over relief if the conditions for such relief are otherwise met. 
 As the hon. Gentleman said, businesses wanted the changes, which were widely consulted on and widely welcomed. They will stop the de-grouping charge being an impediment when companies wish to restructure for commercial reasons and are much more important to business than any potential change to the six-year rule. We are not persuaded that further relaxation of the de-grouping charge is either necessary or desirable, so I urge the Committee not to accept the hon. Gentleman's new clause.

Howard Flight: May I just ask whether, under the arrangements in clause 41, the Minister sees any other way in which totally innocent transactions that would otherwise have been caught under the six-year rule can escape being treated unfairly? The logic of leaving the six-rule year, which is why a six-year period is taken, shows that the intention of the clause is finally to tidy up all unfair or problematic issues that existed before.

Ruth Kelly: I hope that the hon. Gentleman accepts the principle that companies should not be able to restructure in order to avoid legitimate tax being paid. It is right in principle to collect that tax regardless of the time period involved. The six-year rule is a reasonable balance between the competing tensions of the need to collect tax and minimising compliance burdens on business. It does not inhibit commercial transactions because it is about providing companies with greater flexibility.
 As I said, businesses need to keep tax records for that length of time. Significant technological advances mean that it is easier than in the past to keep records and track asset transfers, and that that not a significant burden on companies. If companies come to us with evidence that it is a significant burden, we shall obviously think of ways in which to reduce the compliance burden further. However, I do not see it as an impediment to business.

Howard Flight: As I said at the outset, we are generally happy with the clause, as is business. I was pleased to hear the Economic Secretary's comment that the Government will keep the issue under review. The crucial issue concerns what is sufficient to counteract the envelope scheme arrangements.
 Question put and agreed to. 
 Clause 41 ordered to stand part of the Bill. 
 Clause 42 ordered to stand part of the Bill. 
 Schedule 7 agreed to.

Clause 43 - Exemptions for disposals by companies

Howard Flight: As is evident, most of the points that we wish to raise are covered in amendments to schedule 8. The clause seeks to achieve something on which there has been extensive consultation with business over a number of years. Again, we give the clause a tick in principle, but there are quite a lot of outstanding concerns about schedule 8.
 The clause contains a wide-ranging anti-avoidance provision, the meaning of which is unclear. If the provision were enacted, it would create substantial uncertainty and could exclude from the exemption a broad category of transactions that we are assured it is not intended to exempt. Most of the forthcoming amendments relate to that, but I want to put on record that in principle we welcome the objective of the clause and the constructive approach to addressing that territory.

Ruth Kelly: I thank the hon. Gentleman for his words of welcome. There has indeed been very extensive consultation on the clause. It was announced in Budget 2000 that the Government would consult on the possibility of introducing a roll-over relief for gains on substantial shareholdings held by companies. In June of that year, the Inland Revenue issued a technical note outlining possible roll-over relief. In November, another technical note was issued outlining the form of the roll-over relief and raising the possibility of an exemption as an alternative to that. In the following Budget there was an announcement that the exemption for company gains would be examined in the context of wide-ranging consultation on the direction of company tax reform. That was followed in June by a substantial consultative document on large business taxation, which discussed both roll-over relief and exemption in a wider context. At around the same time, draft clauses were published for comment in the pre-Budget report. In March this year the Chancellor confirmed that exemption would be introduced from 1 April and the final draft legislation was published. The provision has been welcomed by the business community and is an integral part of our programme for modernising company taxation. The new regime will enable United Kingdom companies to restructure rapidly and flexibly in response to emerging global opportunities without being constrained by the tax system.
 Question put and agreed to. 
 Clause 43 ordered to stand part of the Bill.

Schedule 8 - Insurance and mutual trading companies

Edward Davey: I beg to move amendment No. 82, in page 151, line 37, leave out paragraph 5.
 I, too, welcome you to the Chair, Mr. Benton. I also welcome the thrust of clause 43 and schedule 8, as did the hon. Member for Arundel and South Downs. There has been a huge amount of consultation on the provisions, which have been widely welcomed by business and the tax profession. Their objective, which I am sure all Committee members share, is to ensure that the UK remains a competitive place for the location of holding companies of multinationals. The Government's approach to the matter has been exemplary. They ensured that significant consultation took place and that the draft legislation was available for consultation. 
 I prefaced my comments with that welcome so that the Committee realises that the aim of amendment No. 82 and subsequent amendments to the schedule was to be constructive. We have listened to outside bodies that have read the Bill and are pleased with the thrust of it but see the need, even at this late stage, for improvement so that it meets the Government's objectives. 
 Amendment No. 82 was suggested to me by the Confederation of British Industry, which wrote to all Committee members. When it approached me, I listened to what it had to say, read its background briefing and was convinced that there is a case for the Government to look again at the anti-avoidance measures that they are introducing with the new exemption. Paragraph 5 of new schedule 7AC to the Taxation of Chargeable Gains Act 1992, which schedule 8 introduces and the amendment would remove, is widely drawn. The general nature of the anti-avoidance provisions has caused concern. Some of the meaning of that paragraph is unclear to many experts, who have put hot towels on their heads and tried to work out what lies behind it. I shall give some examples. 
 Line 44 on page 151 refers to ''substantial''. That must be clarified. I understand that the Inland Revenue intends it to mean 20 per cent. rather than 10 per cent., but that must be made clear. Concern has also been expressed about the phrase, ''represents untaxed profits'' in line 45, because a strict reading of those words by the courts might exclude many transactions that the Inland Revenue had assured business it intended to exempt. There is lack of clarity there. 
 Line 1 of page 152 refers to 
''arrangements from which the sole or main benefit that could be expected to arise . . . is that the gain on the disposal would, by virtue of this Schedule, not be a chargeable gain.''
 The word ''arrangements'' is defined in line 20 to include 
''any scheme, agreement or understanding, whether or not legally enforceable''.
 That definition is very vague in terms of previous tax legislation. It would cause some concern to tax advisers who believe that the test is too vague, as they would not feel certain when they advised companies. I want to focus on that uncertainty, because it is a problem. 
 If we are creating a general anti-avoidance mechanism, about which there is a lack of clarity and certainty, the benefits from the overall policy will not be so easily realised. The situation may arise where companies have been advised that a disposal would be exempt, but it turns out not to be. Significant business decisions might be made that are later found to incur a huge tax penalty, whereas if that had been known beforehand, those changes would not have been made. 
 If Labour Members feel that we are making a point that is too technical, or that may not be valid because there is certainty in the legislation, they should consider the Inland Revenue's response to business concerns. The Inland Revenue has, quite properly, consulted business about its concerns and has said that it will publish guidance and a statement of practice. I suggest that that is not the best way forward. I am told that statements of practice are highly complicated, do not get away from uncertainty and—of most concern—could be overridden by the courts. If there were a challenge, the courts would not necessarily have to abide by the statement of practice. They would look at the legislation, and might give a strict interpretation of the words therein. 
 That raises the question of why the Inland Revenue has decided to take that approach. I understand that it was concerned that the new exemption could be abused. All those who are concerned about securing the Exchequer and supporting the taxpayer should be concerned about that too. When challenged, the Inland Revenue has not managed to come up with convincing examples of the types of schemes that the general anti-avoidance measure is designed to catch. I am told it has come up with a complex, theoretical idea based on the use of financial derivatives, but those lawyers who have looked at the Revenue's example have said that that would be covered by case law. No example suggests that such wide-ranging anti-avoidance power is needed. 
 If Labour Members are concerned that such anti-avoidance measures are needed, they should rest assured because other anti-avoidance measures would apply in this case. There are existing requirements on trading activity and there are minimum holding periods in the Bill. Section 179 of the Taxation of Chargeable Gains Act 1992 contains other relevant anti-avoidance measures, as does the control of foreign companies legislation. All of that provides a framework of anti-avoidance legislation that would assist the Government's purpose as set out in new schedule 7AC (5). 
 If the Government want some sort of extra anti-avoidance provision over and above the measures that I have described, rather than going down a general route, they could engage business in a final round of consultation—I know there has been an extensive period of consultation—before Report to see whether a slightly less draconian, more satisfactory and more targeted approach can be taken to meet the concerns that officials and Ministers may have. If the Government do not accept amendment No. 82—I guess that they probably will not—will Ministers at least assure us that before Report they will continue 
 the welcome practice they have shown throughout the legislation and give an undertaking to the Committee to meet business, in the form of the CBI and possibly other representatives, one more time to see whether the concerns of both the Government and business could be met and answered in some other way?

Howard Flight: I want simply to add that it is interesting that the CBI has specifically said that it feels that the statement of Inland Revenue practice is unsatisfactory because it does not adequately clarify the position, is not a substitute for clear and understandable legislation and is liable to be overwritten by the courts if they are called on in future to interpret the strict wording of the schedule. It says that it is disappointing that in an era in which the tax law rewrite programme is introducing a new approach to tax legislation, Parliament is being asked to approve unclear legislation that will effectively give the Revenue discretion, subject to intervention by the courts, on how to apply the exemption, which it feels is undesirable in principle.

John Burnett: I welcome you to the Chair, Mr. Benton. I hope that it will be in order for me to comment on the generality of schedule 8, and in particular clauses 20 and 21, which limit the exemptions to trading companies. If that is not in order at this stage, Mr. Benton, please let me know and I shall address the matter later in the stand part debate.

Joe Benton: Order. I should prefer the hon. Gentleman to leave his remarks on the generality of the schedule until the stand part debate.

John Burnett: Thank you, Mr. Benton.

Mark Hoban: May I, too, welcome you to the Chair, Mr. Benton?
 I welcome clause 43, which is important for business. Having worked with clients on transactions in which tax issues played an important part in their timing, I know that the measures in the clause are to the advantage of business, and it is therefore not surprising that businesses have given them a warm welcome. 
 I want to pick up on the comments made by my hon. Friend the Member for Arundel and South Downs and by the hon. Member for Kingston and Surbiton (Mr. Davey) on the scope of new schedule 7AC(5), a matter on which not only the CBI but the Chartered Institute of Taxation has made representations. This morning, Committee members will have received representations from the Institute of Chartered Accountants in England and Wales, of which I am a member, concerning the clause. Interestingly, the ICAEW's view is that paragraph 5, which contains the anti-avoidance measures, is so widely drafted that it appears to catch almost any disposal, which is a concern to industry as a whole. If the Revenue were improperly to apply paragraph 5, that would risk emasculating a relief which business regards as very important. 
 As the hon. Member for Kingston and Surbiton said, we need greater certainty in the taxation of transactions. The ICAEW states: 
''The paragraph hands too much discretion to the Revenue to decide what transactions will qualify for the relief and what will not. Taxpayers are entitled to be taxed according to the law and not untaxed by Revenue practice.''
 That is a legitimate concern, and I hope that Ministers will consider whether it would be appropriate to withdraw the clause so that they can consider whether specific anti-avoidance regulations could be drafted to tackle examples, with which I am sure that they are armed, of transactions that they are trying to rule out. They need to see whether there is a more specific way of ensuring that transactions are not structured to avoid tax, which would give a greater degree of certainty to businesses and their advisers.

Mark Field: I want briefly to support what other Conservative Members have said.
 As a matter of strategy, I am concerned that too much authority will be in the hands of the Inland Revenue if it has discretion on those matters, which would be a retrograde step. I appreciate that when the Economic Secretary dealt with the previous clause she referred to the concept of anti-avoidance. One could cynically suggest that much of the feeling on the matter from accountancy experts and those in other related professions derives from an attempt to discover avoidance measures on their clients' behalf. It is wrong that a company should have to structure its affairs to maximise the amount of tax that it pays. Although I support what the Government are trying to do, there is far too much discretion in the Revenue's hands, and such a lack of certainty will be damaging to business. I would be grateful for guidance on how the Government intend to ensure that the Revenue's discretion is kept to a minimum.

Ruth Kelly: I thank the hon. Member for Kingston and Surbiton for his opening comments that clause 43 is drafted in exemplary fashion, and that it was a good idea for the legislation to be available in advance for widespread consultation. That input has been valuable, and we have learnt much from consulting business and others who will be affected. We continue to learn from them, and we remain in dialogue with industry. Indeed, a partner in a major firm of accountants recently wrote in the Financial Times:
''measures such as . . . the substantial shareholdings relief show what a good consultative process can achieve''.
 In the context of generous relief and substantial shareholdings, the amendment would remove a provision that will protect the regime against exploitation. The protection is designed to prevent companies from realising untaxed investment returns by way of shared disposal, where the gain on the disposal would be exempt under the new regime. 
 It was recognised by many participants in the consultation process that we have legitimate concerns about the potential abuse of the exemption provided by the regime. We are particularly concerned that schemes could be created for converting untaxed income into tax-free capital gains. The draft legislation published at the time of the pre-Budget report last November sought to tackle those concerns by excluding certain types of financial and investment activity from being qualifying trading activities under 
 the regime. Business told us that that approach was too wide and could result in the exclusion of many genuine trading operations, but it continues to accept the validity of our concerns. 
 In consultation with the business community and through listening to its concern that the legislation was too widely drafted, we developed an alternative, suggested test. That test, which the hon. Member for Kingston and Surbiton queries, will prevent a gain from qualifying for an exemption where certain conditions are satisfied and tax-avoidance arrangements exist. The arrangements must be such that the sole or main benefit that can be expected to arise from them is that the gain would be exempt under the substantial shareholdings regime. The scheme is designed merely to take advantage of that loophole, and does not relate to any fundamental commercial activity. 
 Notwithstanding that extensive consultation, I have read the comments of the CBI and others about the provision's scope since the publication of the legislation, and am aware that there have been continuing mutterings about its being drawn too widely. In the light of those fears and earlier consultation with industry, the Inland Revenue is preparing detailed guidance that will set out the scope of the provision. The guidance is being prepared in close consultation with industry. The Revenue also seeks comments from all other parties who have an interest. When finalised, the detailed guidance will be published as a statement of practice, which should reassure the hon. Gentleman to some extent and allay companies' worries about the provision. It will demonstrate the Revenue's view that the provision is narrowly focused. 
 The need for tax-avoidance arrangements from the outset ensures that all normal disposals of substantial shareholdings will be unaffected by the anti-avoidance rule. It is important to put on the record that the vast majority of disposals of substantial shareholdings will not be affected by the anti-avoidance legislation. The Revenue has already received a number of encouraging comments that that is likely to be the case. For example, in its comments on the Finance Bill, the Chartered Institute of Taxation said: 
''We are pleased that the Revenue are to publish guidance on the application of paragraph 5 and that further discussions will be held''.
 Why did we decide to provide guidance rather than put everything in legislation? It is much easier to capture schemes, which can be very varied, and to be more flexible and illustrative in guidance than in legislation. We have received various suggestions as to how we might put beyond doubt in statute, if we were to write such legislation, the circumstances that would not be excluded from the scope of the exemption. However, a provision that dealt explicitly with every situation that might arise—even if they could all be predicted—would be too long to be practicable. The current tests have the benefit of being short and readily comprehensible, so I am not attracted to the idea of tinkering with them. 
 The hon. Member for Kingston and Surbiton raised the Inland Revenue example, which gives a case in which avoidance might occur. In the example, if a company were to arrange for a subsidiary to buy a package of financial derivatives that were held such that it constituted the carrying-on of a financial trade and then sell the shares and subsidiary before the profits from the derivatives were realised, the gain on the sale of the shares would be exempt. We think that that is unlikely to happen in practice, as the gain will be captured by this anti-avoidance measure. 
 The hon. Gentleman and others raised concerns about uncertainties in the drafting of the legislation. It might be helpful to try to allay some of his concerns about that. He asked about the term ''arrangements'' in the schedule. The term is used elsewhere in tax legislation; it is not new. For example, it is used in the enterprise investment scheme. He also said that the interpretation of the term ''substantial'' is uncertain. However, there is already guidance on the meaning of ''substantial'' in the context of capital gains tax taper relief, and the Inland Revenue has confirmed that it will also apply in this context. The detailed drafting issues that the hon. Gentleman raised have already been dealt with or are not new, and I am sure that people will come to understand that as they look more closely at the legislation. 
 The hon. Gentleman said that so much uncertainty affects paragraph 5 that it is no longer useful. The anti-avoidance provision will have no application whatsoever in the vast majority of cases, and companies understand that it will not apply if they are carrying out reasonable rearrangements and restructurings. Again, I hope that that allays his concerns. He queried whether we would be willing to meet the CBI to discuss the matter. The Inland Revenue has been in close contact with the CBI and others in the development of the guidance. Indeed, I believe that it has a meeting with the CBI on the anti-avoidance legislation later this week.

Edward Davey: I am pleased that the Inland Revenue is meeting with the CBI to discuss the guidance. Will they consider possible changes to the legislation, so that we could revert to the matter on Report, possibly through Government amendments?

Ruth Kelly: I strongly believe that the consultation with the CBI and others will satisfy them that the drafting of guidance meets their concerns. We always keep in contact with the industry and it is only right that we do so. Avoidance measures change from year to year, so we return to the provisions in the natural course of events.
 I believe strongly that if we provide generous relief to companies, we, as the Government and the Exchequer, have a duty to protect ourselves against schemes that are specifically set up to avoid paying tax. I urge the Committee to reject the amendment because it would provide no effective protection against the exploitation of this generous and valuable relief.

Edward Davey: I am grateful for the Minister's long and comprehensive reply and I am sure that those who read our proceedings will find it useful as an indication of the Government's thinking. However, she quoted
 the Chartered Institute of Taxation's briefing and suggested that it was pleased with the Inland Revenue's approach. The same briefing stated:
''In our view, the anti-avoidance provisions of new Sch 7AC para 5 are too widely drawn given that the relief is intended to be easy to use.''
 There is a discrepancy. The Minister argued that the provision is narrowly drawn—

Ruth Kelly: Perhaps I can comment on what the hon. Gentleman has said. I believe that some of the concerns of the Chartered Institute of Taxation have been allayed since their briefing and following consultation with the Inland Revenue. We are developing guidance that will be translated into a clear statement of practice in due course and it will be clear that the provision is very narrowly focused and not wide ranging.

Edward Davey: The Minister is slightly more up to date than I am in relation to briefing from the Chartered Institute of Taxation, so I shall bow to her and say that perhaps I need to talk to the institute. It is good to have that on record. This has been a useful debate and I shall talk to both the CBI and the institute. I hope that the Committee will be kept informed of how the discussions with the Inland Revenue are progressing. They seem to have been constructive. If that continues and if we have greater consensus when we come to Report, we shall have made progress. I do not wish to press the amendment. On the understanding that, if the issue is not sorted out during the consultation, we can return to it on Report, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 64, in page 153, line 3, leave out 'or interests in shares'.
 This technical amendment was prompted by the Law Society to ensure that a shareholding is not excluded from the new exemption for substantial shareholdings if the interest in the company is held by way of instruments other than shares—for example, convertible loan stock. The point of concern is that a wholly owned subsidiary could fail the test for a substantial shareholding if it has an issue of a normal commercial loan held by another group company. If a company owned 100 per cent. of the shares in a subsidiary, which issued to the parent company a limited recourse loan of a convertible security, that security would not be treated as a normal commercial loan, and if during any period the interest on the security were equal to the amount of profits available for distribution to equity holders, the parent company would not be entitled as a holder of ordinary shares to any of the company profits available for distribution and would thus fail the test for holding a substantial shareholding in a subsidiary, although the subsidiary might be wholly owned for the purpose of group relief under the CGT grouping test. This small amendment seeks to avoid that problem, which I trust was unintentional.

Ruth Kelly: I listened with great interest to the hon. Gentleman's comments because I was eager to learn the amendment's purpose, which was not—I hope that this will not embarrass him—completely clear on first
 reading. By way of background, I should point out that the substantial shareholdings provisions apply not only to shares but to interests in shares. For those purposes, a company has an interest in shares if it owns them together with one or more persons. If the substantial shareholdings provisions did not include interests in shares, the disposal of an interest in shares would give rise to a chargeable gain or allowable loss. That would contrast with a gain or loss on the disposal of shares, which would be exempt, were the necessary conditions met. It would also mean that a company had a choice when disposing of shares. If such shares stood at a gain, it would be possible to dispose of them and to benefit from an exemption on their disposal. If they stood at a loss, it might be possible for a company to arrange to dispose only of an interest in them.
 The amendment moved by the hon. Member for Arundel and South Downs is aimed at circumstances in which a company has a substantial shareholding in another company, which makes it a creditor of that company in respect of certain types of loan. He believes that that may cause the substantial shareholding requirement to fail. He has explained that the amendment relates to cases in which an investing company holds 10 per cent. or more of the ordinary shares in another company and is also a creditor. He suggests that in those circumstances the shares may be prevented from being a substantial shareholding because they do not provide the necessary entitlements to 10 per cent. or more of the profits and assets of the company in question. The rights that the investing company enjoys as a loan creditor may instead satisfy those entitlements. There may be something in the point raised by the Law Society, but it is difficult at this stage to know whether that is a significant and practical point, or whether it is purely theoretical.

John Burnett: The Economic Secretary has made a comprehensive exposition of the problem. I wonder whether the Revenue will consider inherent rights of convertibility in loan stock, and whether those inherent rights should be taken into account when it considers the definition of ''substantial shareholding'' in that context.

Ruth Kelly: Let me deal with the point made by the hon. Member for Arundel and South Downs, and I shall come to the hon. Member for Torridge and West Devon (Mr. Burnett) in a moment.
 The amendment would remove the reference to interest in shares from sub-paragraph (1), but leave unaffected the way in which it applies to shares. The hon. Member for Torridge and West Devon has suggested that we should consider another way of remedying that proposal. At this stage, I am clearly not going to commit the Government to his precise recommendations, but we shall look at what he has suggested and I shall write to him on that point. There will, of course, be other points of detail on the application of the substantial shareholdings provisions to actual cases that emerge over the coming months, and we are determined to ascertain whether there are practical problems that need to be addressed.

John Burnett: I am extremely grateful to the Economic Secretary for that assurance. I should like
 to receive her letter in the near future because we should like to debate the matter again, perhaps on Report.

Ruth Kelly: I shall ask the Inland Revenue to consider the hon. Gentleman's proposal. If he has a point, we will respond positively to him on it, but I do not want to commit myself to accepting it today. I will provide an assurance that we will respond quickly to the hon. Gentleman's points so that the Committee can have the benefit of that letter before we return to the subject. During the coming months, the Inland Revenue will continue to consult the consultative group and others on the operation of the legislation, which will enable any practical difficulties that emerge from that process to be dealt with. If a real practical issue needs to be addressed in the light of operating experience, we can return to it.

Howard Flight: I am glad to hear the Economic Secretary comment that if, on further consideration, the Government accept that there is a practical issue, they will look to address it. I deliberately read into the record circumstances that were not just theoretical. On the basis of what she said, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment No. 39, in page 153, line 5, leave out '10' and insert '5'.

Joe Benton: With this it will be convenient to take amendment No. 40, in page 153, line 7, leave out '10' and insert '5'.

Mark Hoban: These are probing amendments. Their purpose is to understand why the Government chose 10 per cent. as the right number for substantial shareholding. I understand that in the Netherlands, the figure is 5 per cent. In Germany, there is no de minimis limit on substantial shareholdings. We need to ensure that the corporate environment in the UK is competitive in terms of taxation, and encourages companies to invest and to realise their gains where appropriate. Many in industry are relieved that the limit is as low as 10 per cent. The consultation paper stated 30 per cent., and some people are grateful that the figure is now 10 per cent. That is not a reason for the Government to be complacent on the matter, as I am sure the Economic Secretary would expect me to say.
 In what is a complex commercial environment, I wonder whether 10 per cent. is too high a limit. There is a growing number of examples of transactions, perhaps on a cross-border basis, where there are strategic shareholdings below 10 per cent. Those transactions are not cases of companies simply taking short-term positions, but part of a process of ensuring that they can play a part in developing new markets in various territories. We heard from the telecom sector that, when new mobile phone licences were issued, several overseas companies invested relatively small stakes that were strategic in intent, 
 which formed part of their plans to develop mobile phone services internationally. 
 It is with those transactions and the general complexity of transactions in mind that I have tabled an amendment to query whether 10 per cent. is too high a figure. A low limit, such as 5 per cent., might be better. It is important to ensure that we maximise corporate efficiency by enabling businesses to conduct transactions for economic purposes, not simply for tax purposes. Tax should not act as a barrier to investment or divestment. The Paymaster General said on Thursday that the tax should not distort behaviour. A limit such as this may well distort behaviour. I would be grateful if the Economic Secretary would outline the Treasury's thinking on the 10 per cent. figure, notwithstanding the general welcome that industry has given to that much lower limit.

Howard Flight: At the end of the day, the purpose of clause 43 is to keep the UK competitive as a base for multinational businesses, when there are several costs arising from the Budget on other matters, and when the competitiveness of the UK has generally declined. The question at the centre of clause 43 is: are we competitive enough compared to, for example, Holland?

Ruth Kelly: I thank the hon. Member for Fareham (Mr. Hoban) for his amendment, which gives me an opportunity to put on record why we chose the threshold of 10 per cent. as opposed to any other number and why we did not devise a different, perhaps more complex test, to distinguish between shareholdings that are structural to a business rather than those that are simply a passive portfolio of investments. The desire to be able to distinguish between those two types of arrangements is the key to the threshold.
 The rules must differentiate holdings in some way. During the consultation period, we explored the possibility of operating an alternative to a numerical test. We had hoped to devise a test that would distinguish absolutely between structural holdings and passive investment holdings, whatever the size of the holding. The test would have had to be sufficiently robust to be proof against manipulation according to whether gains or losses were expected. Unfortunately, it was not possible to devise such a test. That is why we settled on a numerical test, which has the merits of being easy to understand and straightforward to apply. 
 We listened to what business told us during the consultation period. It was content with the 10 per cent. figure. We believe that it will target the vast majority of structural holdings while excluding the bulk of portfolio holdings. It has been widely accepted as the most appropriate solution. To reduce the figure to 5 per cent., as proposed in the amendment of the hon. Member for Fareham, would considerably increase the number of portfolio investments that would qualify for the exemption. We accept that some holdings between 5 and 10 per cent. may be structural, and we have not completely abandoned the idea of seeking an alternative workable test to differentiate between the two. However, until such a test emerges, I 
 am not persuaded that it would be right to abandon the threshold requirement. 
 The hon. Gentleman discussed the situation in other countries such as the Netherlands and Germany. A wide range of thresholds operates in other countries that have similar reliefs. The hon. Gentleman gave examples of two that have lower thresholds, but others apply higher thresholds. The key is that Governments structure the relief, including the qualifying threshold, to reflect their underlying policy objectives. The threshold that we have set makes what I readily admit is a fairly rough and ready distinction between portfolio and commercial investments. A balance must be found, and a threshold of 10 per cent. is the right level to set to avoid capturing the vast majority of portfolio investments. On those grounds, I do not support the hon. Gentleman's amendment.

Rob Marris: Do the Government intend in paragraph 8(1)(a) that it should be 10 per cent. of the company's ordinary issue share capital?

Ruth Kelly: I confirm that that is the case.

Mark Hoban: I am grateful for the Economic Secretary's explanation of the way in which she arrived at the 10 per cent. figure. It sounds as though she has adopted a very pragmatic approach and I appreciate the basis on which the test has been developed because of my experience with quantitative tests of what is or is not strategic. People party to shady agreements may frame if not manipulate them to give an appropriate level of control according to their tax or accounting needs at the time. Therefore, I understand why she decided on a numerical limit.
 I am not persuaded, however, that 10 per cent. is necessarily the right number. The Economic Secretary said that there could be situations in which shareholdings of between 5 to 10 per cent. are strategic. As I said in my opening remarks, this is a probing amendment. I am grateful that the hon. Lady put on record the rationale for her decision.

Mark Field: I was intrigued by the comments of my hon. Friend the Member for Fareham and the Economic Secretary. Will my hon. Friend comment on the fact that the initial consultation exercise suggested that the portfolio holding should be at the level of 30 per cent.? Perhaps that lets the cat out of the bag as to the Government's real intentions.

Mark Hoban: It is not entirely clear why the Government started off with 30 per cent.

Dawn Primarolo: We have to start somewhere.

Mark Hoban: I suspect that starting at a higher level allows the Government to retreat graciously to 10 per cent., which they know will gain broad acclaim from the industry. Perhaps that is the explanation for which my hon. Friend was searching, although we did not hear it from the Economic Secretary.
 The Government must carefully consider the measure, including the 10 per cent. limit. I hope that those who read the record and who have an interest in the legislation, make further representations on behalf of industry and commerce. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 63, in page 157, line 18, at end insert—
'or would have been so treated as not involving a disposal or acquisition but for the application of paragraph 4 above'.

Joe Benton: With this it will be convenient to discuss amendment No. 62, in page 157, line 20, after '136', insert
'or would have applied but for the application of paragraph 4 of above'.

Howard Flight: These are further technical amendments prompted by the Law Society. Their purpose is to ensure that a share exchange or reorganisation, which would not have otherwise given rise to a disposal for tax purposes, will not result in a period of ownership coming to an end for an entitlement to exemptions on gains from substantial shareholdings. The argument is that it would be incorrect on principle for a period of ownership to be terminated by a share exchange or other reconstruction normally treated as not involving disposal. The amendments are designed to apply when the transaction would have fallen within section 127 of the Taxation of Chargeable Gains Act 1992 but for paragraph (4) of new schedule 7AC to that Act.

Ruth Kelly: The amendments relate to the interaction of substantial shareholdings provisions and the general capital gains freeze for transactions such as share exchanges. Such transactions are complex and the Inland Revenue will publish guidance on the more difficult aspects, particularly as they relate to groups of companies. In this technical area, I shall try to keep matters as simple as possible.
 A typical share exchange may arise in a takeover: a company exchanges its shares in the company being taken over for new shares in the acquiring company. For example, company A may hold shares in company B, then company C takes over B and issues its own shares to A in exchange for the shares that A holds in B; A now holds shares in C, which holds shares in B. I apologise to the Committee for going into detail, but it is important for the record. 
 To avoid company A incurring an immediate tax charge on any capital gain arising from the transaction, it is normally treated as not having disposed of the shares in company B for the purposes of tax on chargeable gains. In the jargon, it is said that the new shares held by A in company C stand in the shoes of the original shares in B. In a substantial shareholdings context however, that general rule would produce a harsh result if the shares held by A and B would have qualified for an exemption but the new shares in C would not qualify for an exemption on a subsequent disposal. In order not to disadvantage A in such circumstances, the general stand-in-shoes provisions are switched off with the result that there is a disposal on takeover. On that disposal, benefits from the substantial shareholdings exemption, and the new shares, will normally have an acquisition cost for capital gains purposes that reflects their market value at the time of the share exchange. In effect, the shares of the company making the takeover—company C in the example—are a completely new holding. The shares in company B 
 are treated as having been disposed of. In no sense do the shares in company C stand in the shoes of the original shares of company B. It is therefore right in principle that the holding period for the new shares commences when the investing company receives them on the exchange. 
 We do not accept that it is reasonable for the investing company to wait 12 months before it can benefit from exemption on the disposal of new shares. That is no different from a situation in which the investing company acquires shares in other circumstances, quite outside a takeover. It would be anomalous if we made an exception in that sort of case. The way that the provision works seems to be consistent with the approach of the capital gains provisions generally and is right in principle. On that basis, I urge the Committee to reject the amendment.

Howard Flight: Further to that matter—I must confess that I am getting out of my depth—I think that Deloitte and Touche has taken up with the Revenue its diagnosis that paragraph 4 may give rise to an unintended effect in certain circumstances. As set out in the explanatory notes, new schedule 7AC (4) is designed to disapply special stand-in-shoes provisions in certain circumstances. As drafted, the operation seems to result in the stand-in-shoes provisions continuing to apply to a transaction.
 I do not want to burn up the Committee's time with full detail, but my secondary point is to ask the Economic Secretary if she is entirely happy that paragraph (4) is correct. If a share exchange or reorganisation would not give rise to disposal for tax purposes, it should not result in a period of new ownership coming to an end for the purposes of the new exemption. It was not clear whether the hon. Lady was agreeing with that principle but objecting to the other potential effects of the amendment.

Ruth Kelly: These rules are certainly formidably complicated. What I would say in mitigation is that they have been around for a long time. The complexity surrounding them is not gratuitous, but arises from a policy desire to provide relief from a tax charge in certain circumstances. If the rules were not in place, there would be a charge to tax on any gain arising on the straightforward exchange of shares when one company was taken over by another. I think that the rules are necessary.
 The point that the hon. Member for Arundel and South Downs raised about Deloitte and Touche is covered in the detailed guidance that is being set out by the Revenue. I do not accept that the clause is in any way distorting commercial behaviour. Share exchanges and other forms of company reconstruction will normally continue to be tax neutral for corporation tax purposes at the time of the event. If one holding of shares were treated as disposed of for tax purposes and another were treated as acquired, it seems wrong that the new holding should inherit the history of the original shares. That would be appropriate only if the new holding were 
 standing in the shoes of the original holding. On those grounds, I would continue to urge the Committee to reject the amendment, but perhaps the hon. Gentleman will consider withdrawing it.

Howard Flight: I think that the Economic Secretary has satisfied me that where shares stand in shoes, they will qualify for the new exemption. The intent of the amendment was to probe that matter and, on that understanding, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 38, in page 169, line 41, at end insert—
'Part 6 
 Clearance procedure 
 40 (1) Paragraphs 1, 2 or 3 of this Schedule shall be deemed to have effect (and the requirements mentioned therein shall be deemed to have been met), in relation to an investing company where the Board have, on the application of the investing company, notified the investing company concerned that the Board are satisfied that the exemptions in paragraphs 1, 2 or 3 of this Schedule apply to that investing company and that the requirements mentioned in paragraphs 1, 2 or 3 have been met. 
 (2) Any application under sub-paragraph (1) above shall be in writing and shall contain particulars of the operations or transactions that are to be effected by the applicant and the Board may, within 30 days of receipt of the application or of any further particulars previously required under this sub-paragraph, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application. 
 (3) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give notice under sub-paragraph (2) above, within 30 days of the notice being complied with. 
 (4) If the Board notify the applicant that they are not satisfied as mentioned in sub-paragraph (1) above or do not notify their decision to the applicant within the time required by sub-paragraph (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under sub-paragraph (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of sub-paragraph (1) above as if it were a notification by the Board. 
 (5) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in sub-paragraph (1) above shall be void.'.
 Amendment No. 38 would implement arrangements for a clearance procedure, to which I referred earlier. Before I comment on that, I must point out that one effect of clause 43 would be to encourage vendors to dispose of shares. However, the new intellectual property rules in clause 48 encourage purchasers to acquire assets. The Bill contains a contradiction that needs to be addressed. 
 One of the main criticisms implicit in the comments about the lack of clarity is the need for a clearance process. Without such a process, groups will be expected to dispose of shares, which may have large capital gains, without knowing explicitly whether they will qualify for the exemption. Even after the more detailed statement of practice to which the Economic Secretary referred, a statutory clearance procedure such as that suggested in the amendment would 
 provide the key element of certainty and would be welcomed by businesses. 
 The statement of practice may be sufficient to persuade the various tax lawyers and accountants that a clearance procedure is not necessary, but as the schedule stands, Conservative Members have concluded that the only way round the lack of clarity is to put in a clearance procedure.

John Burnett: I want only to add to the points made by the hon. Member for Arundel and South Downs. Business needs certainty and that should be a principle of the tax system. I question whether the proposed statement of practice will make allowance for all the myriad circumstances that will arise in any proposed transaction for which exemption is sought under the provisions. It is therefore entirely reasonable that there should be a short and swift clearance procedure and I endorse the proposal.

Ruth Kelly: The proposal essentially concerns a formal clearance mechanism for the Inland Revenue.

Howard Flight: Statutory.

Ruth Kelly: Statutory. For practical reasons, I am going to argue that it would not be appropriate for the Inland Revenue to provide such a statutory clearance mechanism, and if businesses looked at it carefully they would not want it for reasons that I shall explain.
 We have already had a substantial exchange this morning about whether the legislation is particularly unclear and whether additional certainty can be generated by the Inland Revenue's guidance. Although I am not going to repeat that debate, I hope that that guidance will allay the concerns that have been expressed. The amendment models the clearing mechanism on existing clearing mechanisms, but such a formal statutory clearing mechanism would impose substantial costs.

Michael Jack: So that we might have that added clarity, will the Economic Secretary give us one or two examples of the existing mechanisms to which she referred?

Ruth Kelly: I shall certainly expand on the existing clearing mechanisms and how they operate, but I want to say a few words about why such a mechanism would not be appropriate. I shall come back to the right hon. Gentleman's point in due course.
 As I said, the provisions to accept gains and losses on substantial shareholdings have been subject to extensive consultation. The regime has been widely welcomed for providing groups of companies with the flexibility to restructure rapidly in response to emerging global opportunities without being constrained by the tax system. Let us consider the resource implications of having a statutory clearing mechanism for both business and the Revenue. The existing clearance procedures are targeted at transactions such as company reconstructions, demergers, the purchase by a company of its own shares, and provisions that cancel tax advantages arising from certain transactions in securities. It is well known that many applications for clearance are made simply because the facility exists and not because of any real uncertainty in the legislation. The Revenue 
 knows from talking to accountants that many applications are made at the insistence of clients, even when the accountant is certain of the tax position. As a result, a very small percentage of applications are refused clearance. 
 The number of clearance applications is already large. There are, for example, more than 4,000 a year on company reconstructions alone. Disposal of a shareholding is a much more common transaction than a company reconstruction. The number of disposals of substantial shareholdings to which the exemption could apply is therefore likely to be much larger and the resources that would have to be devoted to clearance applications, both by companies and their advisers and by the Inland Revenue, would make a clearance procedure an impractical proposition. The costs would be significant, even though, in the great majority of cases, there would be no doubt as to whether the exemption applied. 
 My second reason for rejecting the amendment is that it would be difficult to operate the statutory clearance procedure satisfactorily. Many of the conditions for exemption apply either immediately before or immediately after the time of the disposal. A clearance application, by definition, would be made in advance of the disposal taking place and would have to be considered on the basis of the company's expectation of the facts at the time of the disposal. 
 In some cases, it would be difficult to determine whether the conditions were met within the context of a formal clearance application when there were strict time limits. The position might change and the facts might be different when the transaction took place. There would be a doubling up of work to consider the clearance application and then to check whether the conditions were actually satisfied after the disposal had taken place. There could be void clearances even when the facts were fully and accurately stated when the application was made. 
 In response to the hon. Member for Torridge and West Devon, there are less formal and more satisfactory and appropriate ways of seeking guidance in such cases. The most appropriate way might be for companies and their tax advisers and accountants who are in genuine doubt about whether a provision will apply to discuss the matter with the tax inspector who deals with accounts criteria, such as whether the company is a trading company for purposes of capital gains tax taper relief. For that relief, the company's inspector is prepared to enter into correspondence in cases where there is uncertainty and there is no reason why such an arrangement should not apply to the substantial shareholdings regime. 
 For those essentially practical reasons, it is not in the interests of business to have a formal statutory clearing mechanism. The more informal approach, with advice being taken from the inspector, will work more appropriately and minimise costs.

Howard Flight: I hope that the Minister was saying diplomatically that the Revenue would be happy to operate an informal clearance procedure as opposed to a statutory procedure. It is common ground that even
 after the detailed code of practice there will be grey areas because the territory is so complicated. When dealing with companies, the Revenue has an excellent record of being practical, so I am just about content with an informal procedure. Will the hon. Lady confirm that that is what she was saying? If so, I shall withdraw the amendment, but if not, we may want to return to the matter on Report.

Ruth Kelly: To clear up the point about the sort of advice that the Revenue is able to give, in accordance with existing code of practice 10, the Revenue will advise taxpayers of its view on the application of the law to a particular transaction if there is genuine uncertainty as to the interpretation of the law, provided that the full facts and circumstances have been laid out for the Revenue and the relevant law is contained in a recent Finance Act. In addition, the Revenue will give post-transaction rulings advising on the tax implications of the transaction once it has been carried out.
 In practice, therefore, there is an arrangement that will work well in the case of substantial shareholdings, that will minimise the burden on businesses and that will, in due course, be welcomed by business as a much more practical way of proceeding on the issues.

Howard Flight: I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That this schedule be the Eighth schedule to the Bill.

John Burnett: Now is the time for me to probe one or two of the philosophical points behind the schedule; I may be over-egging it. The provision is welcome—no one doubts that—but it would not be churlish to ask the Economic Secretary to tackle a further matter that arises from the schedule and clause 43. It appears to some that the Government's philosophy or underlying assumption when they introduced the provision was that trading companies are good and investment companies carrying on bona fide commercial investments are bad. In this day and age, such a view is mistaken. It is a dated assumption that virtually every large holding company quoted on the stock market is an investment company.
 Provisions in the Bill define trading groups, into which most companies will probably fall. However, I draw the Economic Secretary's attention to one or two obvious points. Investment companies employ people who pay tax, often at very high rates, and they should be encouraged. We want to retain investment companies in this country and encourage new investment companies to locate here. The measure is wholly welcome for trading companies and groups. 
 I ask the hon. Lady to deal with this fundamental point. Investment is the sine qua non to all business and commercial activities and it is absolutely vital to our economy. In a nutshell, my argument is that the distinction is now completely dated and I hope that the Economic Secretary will tell us that the Government 
 are reconsidering their views, which are not really relevant to a modern, thriving and growing economy. We must encourage investment companies. I am not talking about companies that are involved in tax avoidance and so on, but about investment companies that carry on bona fide commercial investments.

Howard Flight: I second the hon. Gentleman's comments. Indeed, the Chartered Institute of Taxation raised the same matter. It thinks that the distinction between trading and investment companies is inappropriate in the context. Furthermore, it is unsatisfactory that the disposing group has to be a qualifying trading company, both before and after the disposal of shares in a trading company, which appears to have been carried over from the initial consultation process when a deferred system rather than exemption was proposed. As I understand it, that could lead to the extraordinary result that a UK holding company would be exempt from corporation tax on all disposals except the last one, putting the UK at a disadvantage, particularly against Germany and the Netherlands.
 Thirdly, I understand that there could be anomalies between the clause and the proposed legislation on derivatives. I would flag that up for further discussion later in the Bill. Finally, can the Government be urged to include a trading purpose option in addition to the minimum holding?

Ruth Kelly: I thank hon. Members for their comments on the schedule. I certainly enjoyed the description by the hon. Member for Torridge and West Devon of his vision of how the British economy might develop in the next 10 or 20 years. To understand the terms of the provision and its restriction to trading companies, it is important to grasp how it arose. When consultation on the relief for substantial shareholdings began, it was in the context of a deferral relief—the disposal proceeds would then have to be reinvested in qualifying trading assets. The exemption that we are introducing contains no reinvestment requirement.

John Burnett: Will the hon. Lady give way?

Ruth Kelly: Will the hon. Gentleman let me continue for a moment? We sought to maximise the likelihood that the disposal proceeds would be used in the way that contributed most to our fundamental policy objective of increasing UK productivity. The trading provisions are designed to achieve that.
 Our tax system already distinguishes in many ways between trading and investment activities, and the holding and management of property is regarded for such purposes as an investment activity. However, there is nothing to prevent a property company that is a member of a trading group from benefiting from the exemption if it disposes of shares in a trading company, a holding company or a trading group or sub-group. Property companies will not necessarily lose out as a result of the changes. 
 I can tell the hon. Member for Arundel and South Downs that we published in the Budget press release the shape of future consultation on the measures. Perhaps I should not go into all the details, but we said that one of the issues that the consultation would 
 review was the scope for greater alignment between the treatment of investing companies and that of trading companies. I am not going to pre-empt the review or its conclusions, but that will be considered. I am sure that the hon. Member for Torridge and West Devon will make representations to the review, as will other interested parties. 
 On trading purpose other than activity, the purpose for a group of activities is difficult to operate; activity is an easier concept. In practice, purpose can be evidenced only by actual activity. I do not believe that there is a significant difference between the two. In conclusion, I hope that all Committee members will be able to support the schedule.

John Burnett: The Economic Secretary is right that distinctions, often artificial, between bona fide investment companies and trading companies riddle our tax system. I welcome the fact that the matter will be reviewed, and hope that the review will take into account the points made by Opposition Members, especially those that relate to enhancing our economy and the attraction of the United Kingdom as a first-class trading location.
 Question put and agreed to. 
 Schedule 8 agreed to.

Clause 44 - Share exchanges and company reconstructions

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clarification definitions that the clause covers apply only for CGT purposes, which could lead to anomalies between CGT and other taxes, stamp duty in particular. I flag that up for when we come to the relevant clause. The Chartered Institute of Taxation says that it would like confirmation that the clarification provisions are not intended to introduce any substantive change in the law.

Ruth Kelly: The clause and schedule 9 reform the capital gains rules for share exchanges, takeovers and other forms of company reconstruction. It is important for businesses and investors alike that the rules should cater for all the situations that may arise in practice and that they should be on a firm statutory footing. The changes that we are making will do just that.
 The rules will prevent tax on capital gains standing in the way of commercial reconstructions, rolling over any gain that would otherwise arise on the reconstruction. The current rules, which go back to the introduction of CGT in 1965, are not entirely satisfactory. There has always been some uncertainty about what types of corporate reconstruction qualify as a scheme of reconstruction, because there has been no formal definition of that expression. People have had to rely on judgments and court cases, which stretch back to the early years of the last century and inevitably reflect the different business world of that era. Over the years, the Inland Revenue has filled the gap to some extent by publicising what it regards schemes of reconstruction to be. 
 Last year, a court decision established that some types of reconstruction that the Revenue had accepted as schemes of reconstruction did not qualify as such in law, which caused unease in the business community. The decision prevented a variety of arrangements from qualifying as schemes of reconstruction, although there was no policy reason why they should not benefit from favourable tax treatment. Therefore, we are introducing new provisions to restore the position to what it was before the court decision. They put an end to the uncertainty that surrounds qualification for schemes of reconstruction by defining it in the Bill. We have also taken the opportunity to extend the scope of the provisions for share exchanges to companies that do not have share capital by treating the interests of members as though they were shares. The provisions will now apply to exchanges involving companies limited by guarantee, for example. 
 The hon. Member for Arundel and South Downs asked about the interaction of the provisions with the stamp duty regime. CGT and stamp duty are entirely different taxes, with different aims and separate rules. I can assure him, however, that modernisation of the statutory regime, to which we shall come in due course and which was announced in the Budget, provides an opportunity to reconsider the stamp duty rules for schemes of reconstruction. Consideration of the reconstruction reliefs is included in the modernising stamp duty consultation process, which is intended to produce new legislation in next year's Finance Bill. If any anomalies arise, we shall have an opportunity to take them into account. 
 For those reasons, I believe that the clause and schedule 9 will be widely welcomed by business for the certainty and coverage that they provide. 
 Question put and agreed to. 
 Clause 44 ordered to stand part of the Bill.

Schedule 9 - Chargeable gains: share exchanges

Howard Flight: I beg to move amendment No. 71, in page 173, line 31, after 'capital', insert
', preference share capital or debentures'.

Joe Benton: With this we may discuss the following amendments: No. 72, in page 173, line 33, after 'capital', insert
', preference share capital or debentures'.
 No. 73, in page 173, line 34, after 'capital', insert 
', preference share capital or debentures'. 
No. 74, in page 173, line 37, after 'capital', insert 
', preference share capital or debentures'.
 No. 75, in page 173, line 39, after 'capital', insert 
', preference share capital or debentures'.
 No. 83, in page 173, line 41, after 'capital', insert 
'preference share capital or debenture capital'.
 No. 76, in page 173, line 42, after 'capital', insert 
', preference share capital or debentures'.

Howard Flight: The amendments deal with essentially the same technical issue, which was raised by the Law Society. Clause 44 and the schedule provide welcome codification of the definition of reconstruction for the purposes of capital gains tax reliefs, and the amendments would ensure that company reconstructions included those in which not only ordinary shares, but preference shares or debentures were exchanged for new shares. The Law Society raised several specific points, although I will not read out a great addendum. The Government could, however, usefully consider such points before the Bill becomes law.

Ruth Kelly: I cannot support amendments Nos. 71 to 76, but I hope to persuade the hon. Gentleman that they are not necessary.
 A company may wish to simplify its capital structure as it goes through a scheme of reconstruction, and the amendments are designed to facilitate that. However, various arrangements that are already in place and which meet the requirements in the Bill will enable a company's structure to be simplified in that way. For instance, the company can reorganise its capital structure before starting the scheme of reconstruction, or the successor company can reorganise its capital structure afterwards. We have included provisions in the Bill to allow for such changes. 
 I should also note that the meaning of ordinary share capital is quite wide. For example, participating preference shares can count as part of a company's ordinary share capital. Some companies with preference shareholders will, therefore, have no difficulty in simplifying their share capital. 
 I do not oppose amendments Nos. 71 to 76 simply because companies can already effect a scheme of reconstruction by making arrangements fit their circumstances. The problem is that the amendments would have the undesirable effect of widening the scope of what is a reconstruction of a company beyond reasonable bounds. The essential feature of such a scheme is that those who effectively own the business before the reconstruction are still the owners afterwards. We have preserved that key concept in the new provisions by requiring that only holders of ordinary shares receive ordinary shares in the arrangements for the reconstruction. It is the holders of ordinary shares who own the business, because they are entitled to the profits. 
 That essential feature of reconstructions has received long-standing approval from the courts and we should not abandon it, but that is what amendments Nos. 71 to 76 would do. They would allow debenture holders and others who are not co-owners of the business to acquire an ownership stake. Arrangements whereby the ownership of a business is passed to someone else could then be structured as schemes of reconstruction and would benefit from the capital gains rollover treatment that applies to such schemes. For that reason, I must ask the Committee to reject the amendments.

Howard Flight: I understand the point of principle that the Minister raises, and I do not want to undermine it. I simply want to know what the position will be within the existing parameters if our amendments are not made. Will there be a problem with reconstructions that are designed to simplify a company's capital structure, where ordinary shares are issued to preference shareholders or debenture holders of the original company or companies?

Ruth Kelly: I do not believe that that is the case. There is nothing in the new rules to prevent such companies from effecting a scheme of reconstruction. It is merely that preference shareholders and debenture holders cannot be issued ordinary shares in the reconstruction. If a company wishes to simplify its capital structure and go through a reconstruction, it can arrange its matters in such a way that they fall within the meaning of reconstruction as it is now defined. I hope that that reassures the hon. Gentleman.

Howard Flight: I thank the Minister for her comments. The Government might want to look at that area in a little more detail, but I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 9 agreed to.

Clause 45 - Taper relief: holding period for business assets

Question proposed, That the clause stand part of the Bill.

Howard Flight: We have not tabled any amendments to the clause, but I want to make several points. The clause is a positive step, as it reduces the holding period necessary for business assets to obtain maximum taper relief. It has been broadly welcomed, but it does not address certain anomalies. For example, the holder of a business asset can never reduce his taxable gain to nil, whereas the holder of a non-business asset can do so, if indexation is greater than the gain.
 That situation arises because the maximum taper relief is 75 per cent. of the gain and 25 per cent. is taxed. Indexation allowance, which applies to non-business assets provides an inflationary allowance such that the index cost of the asset is effectively what someone would pay today for the same asset, if it had risen in value by the rate of inflation. That means that only the real increase in value is taxed. 
 If an individual held a business asset since January 1985, with an original cost of £100,000, and sold it this year for £200,000, the unindexed gain would be £100,000. Taper relief would be £75,000, leaving £25,000 charged to tax, so he would have to pay tax of £10,000, if he was a 40 per cent. taxpayer. However, if the asset was a non-business asset, the individual would be able to claim indexation allowance of some £91,000, and pay tax at 40 per cent. of £3,460. That anomaly arises because the retail prices index increased by 91.34 per cent. from January 1985 to April 2002, which is the proportion that can be attributed to inflation. In that case, the holder of the non-business asset would be better off than the holder 
 of the business asset. Perhaps the Government would address that to allow the holder of an asset on which taper relief can be claimed to elect for indexation allowance to apply and for the asset to be treated as if it were not a business asset, if that would benefit him. 
 We will come to another anomaly in subsequent clauses, which has been pointed out by the Chartered Institute of Taxation. That is the unfairness of the situation that applies to someone who acquired shares in the company for which they work before September 2000. Supposing an employee, who was made redundant last month, sells his shares later this year and, through no fault of his own, finds that 25 per cent. of his gain is deemed to be a non-business asset. Assuming that he is a higher rate taxpayer, the marginal rate of tax will be 70.5 per cent. For every £1,000 gain, £250 will be taxed in full at 40 per cent., so £750 will be subject to 75 per cent. taper relief. Therefore, the total tax burden on each £1,000 gain will be £175, which is 70.5 per cent. 
 We have tabled an amendment to clause 46, a starred amendment, which would allow individuals, in calculating the length of ownership, to discount the time when the asset was used for non-business purposes. That would not help in the particular examples of retirement or redundancy, but it would deal with the unfairness between pre-2000 and post-2000 business assets.

Chris Grayling: I rise to address a couple of points, the first of which follows on from the comments made by my hon. Friend the Member for Arundel and South Downs.
 On business and non-business assets and potential changes of status in relation to an organisation, Ministers need to be mindful of the situation that can often exist in the early stages of the formation of a business, and in particular the stages in its development when it is backed by venture capital. It is often the case that a person who sets up a business does not end up leading it further down the track. It is very common for somebody to take a business through its first, and possibly its second, round of financing, and then discover that as the business becomes established and developed the investors who are supporting it bring in an additional group of managers to add new experience to it. Very often the person or persons who founded the business may find themselves moving on, retaining shareholdings and no longer working for the company. It is important to tackle that anomaly because it could have an adverse effect that we would not want on entrepreneurial groups in our society and I hope that the Economic Secretary will give that due consideration. 
 Secondly—I refer hon. Members to my declaration in the Register of Members' Interests—I want to probe the status of property assets with the Economic Secretary. In which cases will property assets become business assets? In relation to the burgeoning residential property market and people's involvement as investors in that marketplace, what is the status of property under clause 45? In which circumstances, if any, will it be classified as a business asset?

Michael Jack: I rise to underscore the remarks made by my hon. Friends. The Economic Secretary will have had the very helpful briefing, which deals with some of those matters, from the Chartered Institute of Taxation drawn to her attention. It is probably as well to point out that all such matters are drawn to the attention of Treasury Ministers, who have copious briefings on how to deal with them. I look forward with great interest to what she has to say on those points.
 I should like to take our discussion of clause 45 a little further. Although I welcome the fact that the tapered arrangements for the lowest rate of capital gains tax now apply after two years rather than after four, as they did previously—it is a pleasure to see when a sinner repenteth—I should like the Economy Secretary to spend a few moments explaining the rationale for that move. 
 When tapered tax was introduced, the Government told us that it was good and virtuous. They told us that it would aid investment in British industry. They told us that short-termism was a bad thing, and therefore a taper over a much longer period was entirely to be applauded irrespective of the questions about complexity that Conservative Members raised. On page 49 of the Red Book, clause 45 is justified by reference to 
''simplification of the CGT regime to reduce compliance costs, in particular for those who invest in business and for employees.''
 What a turnaround by the Government. They introduced the complexity that capital gains tax represents and we now have to unpick it. I should be interested to know the reasoning behind that gradual move. 
 Will the Economic Secretary tell us why tapered tax has to be applied at two years, rather than at three years, one year or zero years? She is shrugging her shoulders and smiling in her delightful way, but there must be a reason why the Government took that decision, about which it would be helpful for both Parliament and the world of business to know more. She is well versed in economic analysis and is a highly intelligent person who should have no difficulty in providing information on economic gains under the previous regime of longer tapered arrangements. Can she say how much more investment took place as a result of the arrangements that the clause will reverse? How did British productivity gain from such complexity, and what will be the gains from the change to a two-year regime? Can she expand on the Government's policy, philosophy and approach to capital gains tax? 
 The clause makes a clear distinction between business and non-business assets. Discussions on previous clauses have illustrated that an economic effect can be achieved in the economy through investment in non-business assets. It is about time that the Government outlined their philosophy on capital gains tax, because in successive Finance Bills we have seen a piecemeal unpicking of tapered tax arrangements. The Economic Secretary and the 
 Government owe it to the House and the country to lift the lid a little on their approach to that tax.

John Burnett: I endorse the point made by Conservative Members about people owning disqualifying business assets pre-April 2000. It is preposterous that they must wait until April 2010 to receive full capital gains tax relief, whereas those who acquired an asset after the change in rules receive that relief significantly earlier.
 During the Finance Bill a year ago, the right hon. Member for Fylde and I took that up with the Economic Secretary, but we were never given a satisfactory explanation for that preposterous state of affairs. I am indebted to the Chartered Institute of Taxation for its remarkably lucid parable about Fred and Jim, who both worked for Successful plc. Because poor old Fred held shares prior to April 2000, he would qualify for the 10 per cent. rate of tax only if he were to sell them in April 2010; Jim would get the tax advantage because he held shares after April 2000. That is unsatisfactory because it will not reward individuals who have worked hard, and risked their assets and money, for longer. Those people need rewarding. I look forward to the Economic Secretary's endeavour to defend what many people consider to be indefensible.

Ruth Kelly: I, too, am indebted to the Chartered Institute of Taxation for providing the Opposition Benches with such valuable ammunition, amusing anecdotes and illuminating examples. I intend to deal with them all in my response.
 First, I shall address the point of principle raised by the right hon. Member for Fylde. He referred to what we have said about previous Finance Bills, such as that introducing greater relief for business assets was good and virtuous, and that short-termism was bad. What we did then, and are continuing to do, is introduce a taper relief that means that a tax bill diminishes the longer an asset is held. That is the fundamental principle; it is key to our agenda to reward enterprise, encourage work and increase productivity. I do not accept that our fundamental motive in making the changes has changed in any respect.

John Burnett: Fred would disagree with what the Economic Secretary has said because he has held the asset for a long time and is not getting the reward to which she rightly said he is entitled.

Ruth Kelly: I hope that, in dealing with the point about what the relief is designed to do, I shall also answer the point raised by the hon. Gentleman.
 Why do we have the taper relief? What is its purpose and what is it designed for? I would argue strongly that the Government are not in the business of cutting taxes for no purpose. We are in the business of promoting enterprise and rewarding entrepreneurship, to make commercial decisions more valuable and, hopefully, to promote the direction of investment.

Howard Flight: Surely the Government are also in the business of increasing productivity and economic
 growth, which require the most efficient use of capital. The argument on tapering rates is about locking money into assets that are not ideally allocated. We are all in full agreement on enterprise, motherhood and apple pie, but there is a much bigger second issue relating to capital taxation, which is the efficient use of capital.

Ruth Kelly: I completely agree with the hon. Gentleman, but as he and other hon. Members will understand, we believe that there is actually a market failure concerning start-up and growth companies. We can take action and encourage productivity by the use of the tax system and other policy levers at our disposal. We continue to use the tax system to promote long-term investment and to discourage short-termism.

Mark Hoban: The Economic Secretary is about to launch into a discussion on why long-term investment is good. If long-term investment is good and short-term bad, why are the Government shortening the taper?

Ruth Kelly: The hon. Gentleman interrupted me in mid-flow. If only he had waited, he might have heard the answer. The change that we are making this year will specifically build on the success of earlier reforms and, in particular, encourage investment in start-up and growing companies. For such companies, equity investments are a vital source of finance. However, venture capitalists and other early-stage investors frequently invest with a view to realising their capital in less than two years, so we have designed the taper specifically to take into account the natural mode of operation and interests of venture capitalists, and their investments in start-up businesses. We are doing that to promote the productive potential of this country, to encourage business start-ups and to encourage the right sort of investment to take place.
Several hon. Members rose—

Ruth Kelly: I shall take a couple of interventions, and then I must deal with some of the more specific points raised.

Chris Grayling: Surely we want the venture capital industry to consider the long-term support of businesses, rather than making a short-term buck. A tax system that encourages them to get in and out within two years does nothing to encourage the long-term support of businesses by venture capital firms.

Ruth Kelly: I do not think that the hon. Gentleman's point is realistic. We have a system in which investment in entrepreneurs and start-up companies is usually short term. We do not want to cut out from all the potential gains that we are offering all the companies that make a very valuable investment in start-up companies. It is only right to recognise that their period of investment is usually shorter than that of other companies where investment is held for long periods.

Mark Field: I am happy to give the Economic Secretary the benefit of the doubt in this matter. I suspect that it is just unintended consequences rather than anything malign that she has in mind. I must confess, as someone who benefited from the old system
 of taper relief when it came to selling my business on entering the House, that I should tread carefully in this regard.
 I am concerned that the two-year arrangements effectively make it easier for hit-and-run merchants constantly to set up businesses during a short period of time. Instead of encouraging enterprise and entrepreneurship, they will encourage the worst aspects of the process. Companies will be set up quickly and individuals will move from company to company to take advantage of the very favourable regime for capital gains tax taper relief.

Ruth Kelly: I do not accept that. Holding an asset for 12 months or two years by investing in a company for 12 months or two years is a very valuable benefit to start-up companies, which is what we are specifically trying to encourage. A 12-month or two-year period will not encourage a hit-and-run exercise by investors. The measure will have a huge beneficial effect.

Rob Marris: Will my hon. Friend the Economic Secretary refer to chart 3.1 on page 49 of the Red Book and tell us what the hit-and-run rate of capital gains tax is in the United States and Ireland, where entrepreneurship seems to be much better after 42 months?

Ruth Kelly: The chart speaks for itself and hon. Members can refer to it at their leisure.
 The right hon. Member for Fylde asked about publishing an economic analysis of the impact of the provision. The Inland Revenue is committed to evaluating the impact of the taper relief reforms, but time has been too short to obtain concrete information to analyse. The Revenue continues to draw on the experience of a standing consultative review group of outside interests. It is consulted whenever practical on reforms to taper relief and other suggested changes. 
 On some of the more specific points raised, the hon. Member for Arundel and South Downs suggested that we should consider reducing capital gains relief to zero. The effective tax rate on gains for higher rate taxpayers is now 10 per cent. after two years. I would argue strongly that that not only provides a real incentive to invest in business and encourage share ownership by employees, but it is not clear that making the taper more generous would promote additional cost-effective activity and improved investment performance. I also believe that individuals who make and realise substantial gains should be liable to some tax on those gains. 
 The hon. Gentleman suggested that non-business assets can be contrived to have a gain of zero, but the indexation allowance applies only to April 1998, which is a matter of contention in the Committee. After that, it does not apply to business assets or non-business assets, so his point is neither practical nor significant.

Howard Flight: I was simply saying that the issue is arbitrary. The arithmetic was correct. I was not proposing a zero rate in principle, but asking whether the Government had thought about giving people the option in the rare circumstances in which a long-standing business asset might be banished by the business taper relief.

Ruth Kelly: The appropriate answer is that it would be very complex to have a system of election into indexation or taper relief as circumstances dictate. We are trying to incentivise behaviour, so we are looking to the future rather than the past.
 That brings me to the argument that apportionment is wrong in principle. The hon. Member for Epsom and Ewell (Chris Grayling) referred to apportionment that follows from the need to have two tapers to distinguish productive investment from passive wealth. Time apportionment produces an accurate result when the value of an asset increases uniformly over time, and for many assets that will be a reasonable approximation. Apportionment is a simpler and cheaper system than a valuation-based approach. It is perfectly fair that an asset that has not been a business asset throughout the relevant period of ownership should be treated less generously than one that has. The whole point of a more generous business asset taper is to provide for a lower charge on the gain that accrued while the asset was indeed a business asset. Therefore, it would be unfair to make other poorer taxpayers pay an extra £200 million in tax to end apportionment for no obvious economic or social benefit. 
 The hon. Member for Arundel and South Downs suggested that employee shareholdings should remain business assets after retirement. We give employees business asset taper relief on their shareholdings because they align their interests with those of the company and have an incentive to work more productively. We cannot benefit from increased productivity if they have left work. It is neither unfair nor contrary to the aim of business asset taper relief to give it only for the time that the relevant conditions of a business asset taper are satisfied. 
 It would be unfair to other taxpayers who hold shares that are non-business assets to give relief to ex-employees for periods when the relevant conditions of a business asset taper were not satisfied, simply because those people had satisfied them at some point. Employees who retire would benefit from business asset taper relief on any disposal within 10 years of retirement. It is right that a relief should dwindle the longer they hold the shares as non-employee investments. 
 The hon. Member for Epsom and Ewell asked whether residential property qualified as a business asset. As I understand it, residential property does not normally qualify and is defined as a non-business asset for taper relief. However, there are exceptions to that general rule. Property that is let to a qualifying company and used for trade can qualify as a business asset. I hope that we are interpreting the issue reasonably.

John Burnett: Would furnished holiday lettings also qualify?

Ruth Kelly: I shall have to write to the hon. Gentleman on that issue to clear it up for him.
 I think that I have clearly set out our rationale on the tax. We want to encourage appropriate and 
 valuable economic activity. We do not want to distort the market for start-up finance. The regime is simple and appropriate, and will encourage investment in shares and productive activity.

Michael Jack: I am grateful to the Economic Secretary for those words. I am delighted to hear that the Inland Revenue will produce some analysis to explain how tapered tax operates and, I hope, what its economic effect is. I eagerly anticipate that.
 I also thank the Economic Secretary for agreeing that economic activity was turned off and start-ups were damaged as a result of the original proposals. She said that the purpose of the clause was to address a market failure. The failure would not have been there in the first place had the Government not introduced the original tapered tax regime. If they now say that there is time to change it and put forward an economic rationale, there must have been something wrong with the original proposals. I am grateful to her for confirming that on the record. 
 Question put and agreed to. 
 Clause 45 ordered to stand part of the Bill. 
 Clause 46 ordered to stand part of the Bill.

Schedule 10 - Chargeable gains:

Howard Flight: I beg to move amendment No. 30, in page 179, line 30, at end insert—
'Conditions for shares to qualify as business assets 
 1A (1) Paragraph 4 (conditions for shares to qualify as business assets) is amended as follows. 
 (2) In sub-paragraph (2) for ''if at that time'' substitute ''if at the time it was acquired''. 
 (3) In sub-paragraph (3) for ''if at that time'' substitute ''if at the time it was acquired''. 
 (4) In sub-paragraph (4) for ''if at that time'' substitute ''if at the time it was acquired''.'.
 This is the amendment to which I referred during the stand part debate on clause 45. It is designed to deal with what we still consider to be a potential unfairness in the treatment of people who work for a business, people who have been made redundant and people who have retired. As the Minister pointed out, if the holder of the shares leaves the qualifying appointment, the shares become non-business assets. On a later sale, the proceeds are divided into business and non-business gains and taxed at different rates. It is quite a complicated calculation. A person who sells while employed could easily pay a lower level of capital gains tax than a person who held the shares for a longer period and sold them in retirement. 
 The Economic Secretary's justification did not entirely stand up. I refer to an earlier debate, in which the Government seemed to have no qualms about imposing a tax rate that is now 52 per cent. on the main options, which are designed to encourage people to work hard and to make a success of business. The Government speak with a forked tongue about 
 motivating employees in smaller and medium businesses. 
 The amendment seeks to clarify the position by freezing the status of the shares by reference to whether the person was an employee or a trustee acting on behalf of an employee at the time the shares were acquired. It would not apply to someone who had inherited the shares, who is clearly in a different position. Nor would it apply to non-share assets, because qualification relates to use in a business. The Chartered Institute of Taxation has suggested that paragraph 4 is deemed to have had effect from 6 April 1998, which would deal with the problems.

Mark Hoban: May I add to my hon. Friend's comments? In many respects, there is a world of difference between the circumstances of someone who has shares as a consequence of his or her employment and retires, choosing not to sell the shares but to enjoy their income, and someone who is no longer an employee of the firm but is required to hold on to the shares, or is forced to make a sale as a consequence of their employment being terminated. In private companies, there may be agreement that an employee must sell their shares if they resign from the firm. Clearly, if they take a while to reach agreement with the employer, some part of the gain may be taxed on the basis that the shares are non-business assets. There is an issue if a sale is forced on an employee.
 There are other situations, perhaps as a consequence of a flotation, in which certain shareholders are locked in for a period. For employees at the time of flotation, the lock-in agreement is not lifted on their departure from the company. They may be forced to hold on to the shares for one or two years after they cease to be an employee. On the basis of current legislation, the shares are treated as business assets for the period as an employee, but are treated as a non-business asset and, as a consequence, incur a high capital gains tax charge for the period after they left employment, even though they cannot realise the shares until the lock-in agreement has expired. 
 The amendment addresses a series of anomalies in which people must account for a non-business asset gain. It is important that the Government recognise cases in which employees, through no fault of their own, must pay a high capital gains tax charge as a consequence of the distinction between non-business and business assets.

Ruth Kelly: I remind the Committee that the generous business assets taper relief, which is available to all employees of companies, is designed to achieve productivity benefits. The relief encourages employees to hold shares in the company for which they work. That in turn leads employees to align their interests with those of the company and its owners. Clearly, we cannot obtain such benefits once employees have retired, or moved to employment somewhere else. No matter how closely their interests are aligned with their former company, there is no productivity gain to be had there. We had that debate earlier. On those grounds, we would have nothing to gain from the cost of the relief. As I explained earlier,
 in order to pay for that relief, other taxpayers would have to pay more in tax.
 Of course, business assets taper relief is not all lost when an employee ceases to work for the company concerned. The ex-employee continues to obtain the benefit of business assets taper relief on a disposal in the following 10 years, if he or she does not qualify for business assets taper relief on other grounds—for example, if the company is an unlisted trading company. 
 I am not sure that amendment No. 30 helps the situation or does what the hon. Member for Arundel and South Downs wishes it to do. By focusing merely on the status at the time of acquisition, it means that an asset that was not a business asset at that time could never become a business asset. For example, those assets that were not business assets in 1998 but became business assets from 6 April 2000 thanks to the Finance Act 2000 reforms would now revert to being non-business assets. I know that the Opposition Members did not like the way in which those reforms took effect, but this amendment would not provide a solution to their concerns. 
 In addition, the amendment opens up an avoidance risk. A company might turn from trading to investing, and business assets taper relief would still be retained. The amendment fails to support the policy aim of encouraging employees to align their interests with those of their employer, is wasteful, and risks tax avoidance. 
 The hon. Member for Arundel and South Downs suggested that apportionment is extremely complex in some senses. I would like to reassure the Committee that the Inland Revenue has published tables detailing the apportionment fractions for an asset that was a non-business asset up to 6 April 2000, and an business asset from that point on. I hope that those tables will be help to reduce the complexity for individuals who seek to use them.

Mark Field: I appreciate that the Government want to ensure that there is an alignment of interests, as the
 Economic Secretary rightly says. However, the concern is that at the time of the acquisition those interests may be very much aligned. As set out powerfully by my hon. Friend the Member for Fareham, it may be increasingly the case that acquisition, or options passed on, can only vest some years ahead. The provisions on the acquisition of such options may be being put into place for all the right reasons. However, as my hon. Friend rightly pointed out, if a company then gets taken over, an employee may find himself in very difficult situation several years down the line before he is able to develop the option.

Joe Benton: Order. It is becoming a speech now.

Mark Field: I was wondering whether it was getting close to 1 o'clock.

Ruth Kelly: Opposition Members have raised a variety of situations in which people lose out through no fault of their own. Of course, there will always be situations that are complex. In the legislation, we have sought to put things as simply as possible. I have explained the rationale behind the clause, and on those grounds I suggest that the Committee rejects the amendment.

Howard Flight: I was interested to note that the Economic Secretary repeated the trading versus investment argument referred to earlier, and automatically subscribed to the argument that there is something wicked about investment, which a company desperately needs, and something virtuous about trading in relation to business assets. Capital gains tax arrangements have become a nightmare for citizens, and have been so structured it will be quite tricky for us to reform them in due course. We still think that that is a serious issue.
 It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Four o'clock.